The EU laid out its ambitious plan to steady the finances of the region. The three-part program was explained by the group: “The Council and the Member States have decided today on a comprehensive package of measures to preserve financial stability in Europe, including a European Financial Stabilization mechanism with a total volume of up to 500 billion euros.” The available funds will be backed by the central banks of the 16 Eurozone nations.
The value of the entire financial facility will be close to $1 trillion because it will include 60 billion euros from an EU emergency fund, and 250 billion euros from the IMF. The ECB said it was ready to use the facility to buy euros and private bonds. In concert with the announcement, the Fed will open swaps facilities with central banks in Europe to make certain that they have access to dollars.
The EU believes that the huge pool of capital will prevent further concerns about Greek debt and deficit problems and the chance that these troubles may move to Spain, Portugal, and Italy from mushrooming. The 440 billion part of money made available from Eurozone nations will not be available until it has the final backing of countries involved so the funding entity can borrow money in the capital markets. This indirect method of creating the pool is because of regulations among EU nations that do not allow one country to take on the sovereign obligations of another.
The financial ministers of the EU nations wanted the facility open before the Asian markets began trading. The plan worked to the extent the it calmed trading exchanges as Asia stocks, European shares, and US futures rallied.
One of the primary reasons that the EU pressed to have the facility in place so quickly is because officials in the regions believe that “wolf packs” of speculators have bet against European sovereign debt and the euro pushing their values down. According to The National, Swedish officials said institutional investors were roiling the markets for Europe currencies.
The large pool may keep speculators out of the market, but it will not keep rioters out of the streets. The money available from the EU will make it more likely that Spain and Portugal will borrow to offset their deficits, much as Greece has done. All of these borrowing programs bring with them new requirements of austerity, many of these involving cuts in the social services and public worker pay in the needy nations. Another by-product is higher taxes. These measures have caused rioters to fill the streets in Athens, and there is no reason to believe that Spanish and Portuguese citizens will not react similarly.
The $1 trillion facility will make the financial state of Europe more secure but it cannot conquer the social unrest that goes with the bailouts fashioned from the new pool of money.
Douglas A. McIntyre